Why are student loans set above base rate?

[DangerMouseAndPenfoldx]

Just that really. Why are student loans set above base rate?

The company who runs them (or the government - I don’t really know how it works) are making a profit from them. And continuing that profit for the decades it takes to pay them off.

I guess it’s because some of them won’t be paid off, so the ones who pay them for years are subsidising the ones who don’t ever earn enough to pay?

Do you actually understand where the loans come from - they don't come from the Bank of England, or the money markets, so why would they be linked to base rates? As I said earlier if your kid can get a commercial loan at your mystical low mortgage rate and with no compulsion to repay any of it - feel free. Though I'll save you the bother - they won't be able to.

Plan 5 rate is RPI. The loan doesn't increase in real terms.

And there's no actual subsidising going on - repayments aren't ring-fenced for the next generation of students.

@titchy you are strangely invested and angry. Do you work for the Student Loans Company, or have other close interest?

Taking your comments at face value, yes thank you I do understand where the loans come from. I didn’t know much about it before starting the thread, hence me asking the questions. Some posters have been good enough to post helpful information rather than just expressing incredulity that not everyone knows the inner workings and history of the SLC’s balance books 😅

Not sure why you keep bringing commercial loans up. I don’t think anyone other than you has suggested that should be an option.

What might be genuinely helpful, given you seem to have some knowledge here, is what the logic is on linking the loan interest rate to RPI? It’s a genuine question. Obviously I understand the theory that “the loan doesn’t increase in real terms”, but that’s a strange treatment for a loan. It might make more sense if fees were also increasing at a rate linked to RPI.

I missed this one. I think you are being disingenuous here.

Subsidising in the same sense that payday loan customers who pay 1,000% APR subsidise those who never pay off their loans. Perhaps you would prefer “offset” to “subsidise”, but that seems a little picky.

Plan 5 loans may be RPI and likely to be repaid
https://www.gov.uk/guidance/how-interest-is-calculated-plan-5

Plans 1, 2 and 4 are - according to non SLC data
looking at less than 20% of loans ever being cleared
because the interest rate is so mad
https://www.gov.uk/guidance/how-interest-is-calculated-plan-2

Not sure why you keep bringing commercial loans up. I don’t think anyone other than you has suggested that should be an option.

Because people keep saying the loans are a rip off because mortgage rates are lower. Completely ignoring the fact that if you don't pay your mortgage the bank takes your house.

What might be genuinely helpful, given you seem to have some knowledge here, is what the logic is on linking the loan interest rate to RPI? It’s a genuine question. Obviously I understand the theory that “the loan doesn’t increase in real terms”, but that’s a strange treatment for a loan. It might make more sense if fees were also increasing at a rate linked to RPI.

Well you've said it - the logic of interest equalling RPI is so the real value of the loan doesn't increase.

Yes it's a strange treatment for a loan - but these aren't anything like commercial loans - they're far more akin to a graduate tax. Fixed repayment amounts regardless of loan size would be strange for a normal loan product. Not paying anything back if you earn under the threshold would be strange for a normal loan product. Wiping out the balance after 40 years regardless of how high it is would be strange for a normal loan product. These are not normal loan products.

I work for a university - and we are all desperately hoping that fees go up - there is talk of an RPI increase as it happens.

And it's not disingenuous to point out that graduates are NOT funding future students. It's one of the Gov's many rows of expenditure. We all pay into the Gov coffers, via taxation (including loan repayments) and the Gov pays out of them. Funding the SLC is no different from funding the NHS, schools, defence, state pensions etc. Everything goes into a big pot, and everything comes out of the same big pot.

Your mind is going to be blown when you hear about how insurance works…

@DangerMouseAndPenfoldx It might make more sense if fees were also increasing at a rate linked to RPI.

Well, yes! The longer term solution to making university funding sustainable is a one-off hike in tuition fees and then increasing them at RPI. Currently many unis lose money on home students studying expensive courses (anything which needs more than a lecture hall). But that is a political hot potato.

I do think that Plan 5 is the fairest way so far of implementing the UK's hybrid strategy of "students should pay for their own education but with safety nets for those who never earn much and with Government subsidies for things like medicine."

I remember when fees were introduced, there was some discussion of a Graduate Tax. The funding system is much more like a tax than a loan!

I vaguely recall that one factor was that it's harder to get taxes out of people who leave the UK, but I don't know how many ex-pats keep up with Student Loan payments anyway...